Chicago Mercantile Exchange hiked margins on gold, silver, and copper last Friday

To add some context to the Precious Metals correction last week, I am posting a link to the COMEX announcement Raising Margin Rates for Gold and Silver.

Margin rates determine how much money someone has to pay up front in order to secure a gold order (future).  If someone’s maxed out loading up on futures at 8%, when the rates are increased to 10%, they don’t have the cash to cover the requirement, except by selling out of some of their current positions.

You can download the release here COMEX-Margin-Sept-23

Please see an excerpt below:

11-345

TO:

Clearing Member Firms
Chief Financial Officers
Back Office Managers
Margin Managers

FROM:

CME Clearing

SUBJECT:  Performance Bond Requirements
DATE: Friday, September 23, 2011

To receive advanced notification of Performance Bond (margin) changes, through our free automated mailing list, go to

http://www.cmegroup.com/newsletter/web2lead/web2sf-old.html

and subscribe to the Performance Bond Rates Advisory Notice listserver.

As per the normal review of market volatility to ensure adequate collateral coverage, the Chicago Mercantile Exchange Inc., Clearing House Risk Management staff approved the performance bond requirements for the following products listed below.

The rates will be effective after the close of business on

Monday, September 26, 2011.

Current rates as of:

Friday, September 23, 2011.

Here is an excerpt from COMEX on why it changes Margin Rates

Understanding Margin Changes

At CME Group, we’re intently focused on risk management. In over a century, we have not experienced a default. In more than a century, there has never been a failure by a clearing member to meet a performance bond call or its delivery obligations; nor has there been a failure of a clearing member firm resulting in a loss of customer funds. As part of our overall risk management program, margins are adjusted frequently across all of our products based on market volatility. When daily price moves become more volatile, we typically raise margins to account for the increased risk. Likewise, when daily price moves become less volatile, margins typically go down because the risk of the position also decreases.

Margins are set as part of the neutral risk management services we provide. They aren’t a means to move a market one way or another, or to encourage or discourage participation from one kind of market participant or another. Rather, margin is one of many risk management tools that help us assess overall portfolio risk to protect market participants and the market as a whole.

There are two main margin philosophies that clearing houses can have. First, a clearing house could set margins sufficiently high to cover all possible volatility environments. Changes are less frequent, but margins are higher. Second, and the CME Clearing approach, is to ensure that margins are set to cover 99 percent of the potential price moves. Margins then are lower in less volatile periods and higher in more volatile periods. Changes are often made when the volatility environment experiences a sustained change.

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One Response to “Chicago Mercantile Exchange hiked margins on gold, silver, and copper last Friday”

  1. Jeremy says:

    Redmond
    Not sure I agree with you here. Comex raises margins all the time mostly as a means to maintain the viability/integrity of the contract. As prices march higher margins are typically raised so that if a violent correction occurs the specs on either side of the contract can settle. That being said, these types of higher margin moves almost never results in such a violent correction.

    For what its worth I think the current correction in gold (while sharp) has more to do with margin clerks searching for liquid assets to meet margin calls on tanking equities and fixed income positions. Gold is easy to sell in the search for margin covering.

    I also think from a technical point of view gold got ahead of itself. The charts were overstretched and the late longs needed to be shaken out of their positions.

    I do of course think that the market is still in a secular bull market but the bumps could be strong for the next little while

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